Question4 Which of the following characteristics best describes a project that has a low degree of operating leverage?I. High level of forecasting riskII. Relatively high initial cash outlayIII. High variable costs relative to fixed costsIV. An OCF that is highly sensitive to the sales quantity III I, III, and IV II I and IV ResetMaximum marks: 1 Flag question undefined单项选择题
A
III
B
I, III, and IV
C
II
D
I and IV

Question

Question4 Which of the following characteristics best describes a project that has a low degree of operating leverage?I. High level of forecasting riskII. Relatively high initial cash outlayIII. High variable costs relative to fixed costsIV. An OCF that is highly sensitive to the sales quantity III I, III, and IV II I and IV ResetMaximum marks: 1 Flag question undefined单项选择题

A

III

B

I, III, and IV

C

II

D

I and IV

BlackTom AI · Accepted Answer

Operating leverage reflects the mix of fixed and variable costs; a low degree of operating leverage means costs are mostly variable, so operating cash flow (OCF) is less sensitive to changes in sales.

1) Relevant concepts
- Degree of operating leverage (DOL) measures the percentage change in operating income (or OCF) for a given percentage change in sales: DOL = %ΔOCF / %ΔSales.
- Algebraic form at a given output Q: DOL = Q*(P − V) / [Q*(P − V) − F], where P = price/unit, V = variable cost/unit, F = fixed costs.
- High fixed costs (large F) and low variable costs (small V) increase DOL; conversely, high variable costs relative to fixed costs lower DOL.

2) Step-by-step reasoning with numeric illustration
- Take two cases at Q = 200 units:
  Case A (low DOL): P = $10, V = $8 → contribution/unit = $2. Let fixed F = $100.
    Numerator = Q*(P − V) = 200*2 = 400.
    Denominator = 400 − 100 = 300.
    DOL = 400/300 = 1.333.
  Case B (higher DOL): P = $10, V = $2 → contribution/unit = $8. Let fixed F = $1000.
    Numerator = 200*8 = 1600.
    Denominator = 1600 − 1000 = 600.
    DOL = 1600/600 ≈ 2.667.
- The first case (high variable costs relative to fixed costs) yields a low DOL (~1.33), showing OCF less sensitive to sales changes.

3) Why option III is correct
- Statement III: "High variable costs relative to fixed costs" directly describes the cost structure that produces low operating leverage: most costs move with sales, so operating income/OCF changes little with sales swings. Thus III is correct.

4) Why the other options are incorrect
- I: "High level of forecasting risk" is associated with high operating leverage (large fixed costs create forecasting risk), not low.
- II: "Relatively high initial cash outlay" implies large fixed investment (high F), which increases operating leverage, so not characteristic of low DOL.
- IV: "An OCF that is highly sensitive to the sales quantity" describes high operating leverage, the opposite of low DOL.

Conclusion: Only statement III correctly describes a project with a low degree of operating leverage. This matches the provided answer: III.

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